They Call This Investing?

The FT reports how tech stocks have electrified the stock market, overtaking the so-called Trump trade. The performance has been driven by FANG stocks. Mutual funds that have been lagging for years are now jumping on the bandwagon to try to outperform the S&P 500. If you have been active in the markets for more than the bull phase of this market cycle, you already know how this ends. Emphasis is mine.

The US stock market climbed another 1.4 per cent last week to close at a fresh record high but the tech industry has been the rally’s dominant fuel, particularly the “FAANGtastic five” — Facebook, Apple, Amazon, Netflix and Google — which have each gained between 25 per cent and 32 per cent.

Excluding technology and telecoms shares, the S&P 500 is up 5.3 per cent this year, while the tech sub-index has climbed almost 20 per cent. Annualised, that would make 2017 the best year for the industry since the post-crisis 2009 rebound and comes close to the heady days in 1998-99 that preceded the dotcom bubble bursting.

Tech-focused mutual funds have enjoyed 12 weeks of inflow, and there are some concerns that the valuations of “big tech” shares are becoming stretched.

Investors surveyed by Bank of America in May said that betting on the tech-heavy Nasdaq index was the most crowded trade in markets.

Nonetheless, the rally in tech shares has been a big boon to many mutual fund managers that have struggled with poor performance.

Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.